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Comparing Stock Mutual Fund Performance
Use the following common analysis techniques to compare performance of mutual funds and narrow your portfolio choices from among the nearly 7,800 funds available.
Compare Apples to Apples
Analyze Fund Returns
Put Performance in Perspective
Transaction Costs
Compare Apples to Apples
Compare funds with similar investment styles.
For example, you shouldn't compare a growth–oriented fund with a value–style fund. Historically, growth and value market segments tend to perform well at different times, making comparisons difficult.
Compare funds with similar market capitalizations.
Funds may invest in large–, medium– or small–capitalization stocks, which often take turns leading the market.
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Analyze Fund Returns
Once you've selected funds that interest you, review their total return statistics.
Total return equals:
Income return (from dividends or interest) plus capital return (from price movement up or down) over a specified period of time.
Compare returns over longer periods
5 or 10 years, if available, which is more meaningful than comparing short–term data.
Compare similar time frames
Review returns for 1–, 5–, and 10–year periods, if the fund has been operating for that long. The SEC requires that mutual fund companies report returns for these time frames, which provides a consistent method to compare fund performance. Otherwise, look at the fund's return since inception.
Total returns are stated as average annual return percentages. Cumulative returns show how much an investment grew over some multi–year period. The cumulative method often will show a larger return. Remember, however, that cumulative return periods can vary, making it difficult to compare the performance of several funds.
When evaluating fund returns, make sure the return data are the most recent available.
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Put Performance in Perspective
To calculate share price (also called net asset value or NAV):
Divide the fund's total net assets by the total number of shares outstanding.
The share price of a mutual fund is calculated generally at the close of business each day.
Like individual securities, the NAVs of mutual funds routinely fluctuate and some are more volatile than others. Volatility describes the size and frequency of price fluctuations in an investment. Consider volatility when you assess your risk tolerance.
Common measures of volatility include:
Beta – A measure of how volatile a fund's returns have been compared to its benchmark index. Benchmarks give you an idea of how the fund is performing in relation to an accepted standard. The benchmark's beta always equals 1.
- A fund with a beta greater than 1 had returns that fluctuated more than those of its benchmark.
- A fund with a beta of less than 1 had returns that fluctuated less.
Alpha – Shows how a fund did relative to what would have been expected given the fund's beta and the performance of the benchmark index. It often is considered to represent the value added or subtracted by the fund's manager.
- For example, an alpha of 1.4 means that the fund outperformed its estimated return (based on market activity alone) by 1.4%.
- Investors often look for funds with low betas and high alphas – meaning high returns relative to their levels of risk.
Standard Deviation – Defines how widely returns varied from an average over a given period of time. A higher standard deviation means a more volatile fund.
- A fund with a standard deviation of 9 and an average annual return of 27% saw annualized monthly returns fall within 9 percentage points of that average (or between 18% and 36%) two-thirds of the time.
- Knowing how to assess mutual fund returns and volatility can help you make sensible choices about which funds are best suited to help you achieve your financial goals.
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Transaction Costs
Some costs associated with mutual fund investing include:
- Loads – sales charges
- Management fees – fees assessed by the management company that operates the fund
- 12b–1 fees – marketing and administration costs.
Many fund families offer no–load mutual funds.
Transaction costs also can affect returns, especially if a fund's turnover rate is high. The turnover rate reflects how frequently managers buy and sell shares within a fund.
Funds that have higher costs aren't necessarily bad investments, but those costs should be justified by the funds' returns when compared with similar funds with lower expenses.
Mutual Fund Benchmarks
Several market indexes are used as mutual fund benchmarks. These indexes are not investment products available for purchase. Examples include:
- S&P 500 Index – a market capitalization-weighted, unmanaged index of 500 large common stocks.
- Russell 2000 Index – measures the performance of the 2,000 smallest companies in the Russell 3000 Index (the 3,000 largest publicly traded U.S. companies based on total market capitalization).
- MSCI Europe, Australasia, Far East (EAFE) Index – a widely followed group of stocks from 20 developed market countries.
- Wilshire 5000 Total Market Index – measures the performance of all U.S. headquartered equity securities with readily available price data. Over 7,000 capitalization-weighted security returns are used to adjust the index.
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This information is for educational purposes only and is not intended as investment or tax advice.
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